Countries worldwide have an opportunity to strengthen their positions as financial centres by establishing themselves as hubs for stablecoin transactions

This forward-looking policy would generate significant fee and foreign exchange revenue for financial institutions, ensure proper regulatory oversight of digital currency flows

Countries worldwide have an opportunity to strengthen their positions as financial centres by establishing themselves as hubs for stablecoin transactions. Two complementary strategies—enabling domestic financial institutions (regulated banks and non-banks) to receive and convert foreign stablecoins, and promoting global acceptance of locally issued stablecoins—would bring substantial economic benefits.

This article discusses these strategies and the policy implications for governments and financial institutions.

As stablecoins continue to gain momentum, countries are presented with a unique opportunity to integrate this technology and reap the benefits for their economies and financial sectors. Two complementary strategies that nations can adopt to strengthen their positions as hubs for stablecoin transactions are:

* Enabling domestic financial institutions (regulated banks and non-banks) to receive and convert foreign stablecoins.

* Promoting global acceptance of locally issued stablecoins.

These forward-looking policies would generate significant fee and foreign exchange revenue for financial institutions, ensure proper regulatory oversight of digital currency flows, create diversified demand for government debt and reinforce a nation’s role as an innovative financial centre in the global economy.

Inbound stablecoin conversion

A global stablecoin clearing system would enable a country’s financial institutions to receive stablecoins from foreign issuers and convert them to local currency at par value.

If financial institutions were able to capture just 5% of the hypothetical $1tn global stablecoin redemption flow, this could generate approximately $1.83bn in annual gross revenue for the domestic financial sector. This would create a new revenue stream for banks and regulated fintechs without requiring them to take principal risk. Processing occurs through existing regulatory frameworks similar to how foreign currency cheques are handled today through international cash letter arrangements.

There are several regulatory benefits to this strategy. It ensures all foreign stablecoin flows into the country are processed through regulated institutions with robust know-your-customer, anti-money laundering and sanctions controls. It prevents disintermediation of domestic financial institutions by unregulated offshore stablecoin platforms and unhosted wallets. And it provides regulators with visibility into digital currency flows entering the economy.

This strategy also creates a foundation for bilateral trade negotiations: ‘We’ll facilitate acceptance of your stablecoins on a national level if you’ll do the same for ours.’ It positions the country as a forward-thinking jurisdiction embracing digital currency innovation within regulatory guardrails, and strengthens its competitive position against other financial centres hesitant to engage with digital assets.

Outbound national stablecoins

Promoting global acceptance of locally denominated stablecoins creates international demand for digital national currency, with significant macroeconomic benefits. Locally issued stablecoins held overseas indirectly generate demand for domestic government debt (as backing assets). This creates a new channel for the national currency to act as a reserve currency in digital form and broadens the utility of the domestic currency in international trade and cross-border transactions.

Consider consumers purchasing from overseas merchants through global marketplaces. These substantial payment flows could be denominated in local stablecoins, which many overseas marketplace sellers would willingly hold as part of a diversified currency portfolio. This creates sustainable foreign demand for domestically denominated assets without requiring immediate settlement back to the seller’s local currency.

This strategy extends the country’s financial influence in the growing digital economy, reduces transaction costs for domestic businesses engaged in global trade and provides a complementary digital currency strategy alongside any potential future central bank digital currency initiatives.

Policy recommendations

To make the most of this opportunity, countries should clarify the regulatory treatment of financial institutions receiving foreign stablecoins on behalf of clients and engage with clearing systems like Ubyx to ensure national interests are represented in this emerging infrastructure.

They should establish a cross-sector working group with the finance ministry, central bank, financial regulators and industry participants to develop a coherent national stablecoin strategy. This group should consider targeted incentives to encourage domestic financial institutions to develop stablecoin acceptance capabilities.

Countries should include stablecoin interoperability in discussions with international financial centres and trade partners, while enabling regulated banks and non-banks to participate in public-permissionless blockchains with appropriate risk management frameworks.

Finally, it is important to distinguish between infrastructure and outsourcing in regulatory frameworks to allow financial institutions to operate on public blockchains, as well as support accounting recognition of stablecoins as cash equivalents under appropriate conditions.

Nations that have historically thrived by embracing financial innovation while ensuring appropriate safeguards stand to benefit significantly from stablecoins. A progressive policy approach represents a substantial opportunity to generate economic benefits, strengthen regulatory oversight and enhance a country’s position as a global financial leader in the digital age.

By enabling both inbound conversion and outbound usage of locally-issued stablecoins, nations can establish themselves as pivotal hubs in the global digital currency landscape.

Tony McLaughlin is Founder of Ubyx and the originator of the Regulated Liability Network.

McLaughlin joined OMFIF’s podcast to give exclusive insights into his new Ubyx initiative. You can also read more about this subject in McLaughlin’s white paper.

OMFIF has created a working group to explore the topic of updating bank regulations to fit with public blockchains. Learn more here.